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Basics of Accounting

June 4, 2015

Cash is King

A cash flow statement is one of the most important financial statements reported by a business or nonprofit. Essentially, a cash flow statement will show a company’s use and source of cash during a period of time equivalent to a company’s income statement. It will show the company’s reasons for changes in cash and cash equivalents during the beginning and end of the accounting period. A cash flow statement differs from an income statement because it deals solely with cash rather than revenues and expenses. Some expenses can be depreciation, which will have no effect on cash flow, and some revenues may never be collected. Some accountants argue that a cash flow statement is the most important component of financial statements.

Income Statements

An income statement is one of the two general ledger accounts that acompany cannot do without. Income statements deal with transactions involving revenues and expenses, gains and losses. A large company may have thousands of income statements. For instance: salaries expense, rent expense, advertising expense, and ect. At the end of an accounting year, income statements disappear, and the remaining balance will be transferred either to Retained Earnings for a corporation, or owner’s capital account for a sole proprietorship.

Balance Sheet

Essentially, a balance sheet deals with a company’s assets, liabilities, and stockholder’s equity. Assets are the resources of a company such as cash; liabilities are obligations owed to customers; and Stockholder’s equity is the difference between assets and liabilities. The balance sheet should be read in tangent with other financial statements, specifically the ones stated above. If you feel confused then it is best to reach out to a qualified professional like Kath Egan CPA.

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